239 F. 433 | 6th Cir. | 1917
This appeal is from a decree in effect requiring the bank, appellant, to surrender to appellee, as trustee in bankruptcy of the Reliance Cotton Company, a corporation, for cancellation, certain negotiable bonds and a deed of trust securing them, which had been issued and delivered by the bankrupt. The basis of the decree is a finding in substance that, although the bonds had been received by the bank in pledge to secure a loan, it made to the Reliance Company and the loan had been fully paid, the bank, erroneously believing it had the right so to do, continued to hold the bonds to secure past-due indebtedness of another and distinct corporation, the Memphis Cotton Oil Company.
The two companies so' concerned were Tennessee corporations, the Memphis Company having been organized in 1902 and the Reliance Company in 1905. At the times here in question, B. B. Harvey owned all the shares of stock in both of these companies, except a sufficient number to qualify three persons additional to himself as directors in each company; and the stockholders and directors of each company were the same persons. On July 21, 1913, the stockholders of the Reliance Company met and instructed the directors “to issue $40,000 first mortgage bonds of the company” and to secure them by a trust deed conveying the property of the company located in the states of Tennessee, Mississippi, and Missouri. On the same day the board of directors “authorized and directed” the president and secretary to
When these bonds were directed to be issued, the Memphis Company was largely indebted to the bank and was also in need of more money. The bank was not willing to make further loans to the Memphis Company upon its own credit, nor upon the bonds which it had previously issued and delivered in pledge to the bank, nor upon the additional individual indorsement of B. B. Harvey. In these circumstances the president of the bank suggested to B. B. Harvey a plan for obtaining additional security and money through the Reliance Company; and this plan was the one adopted and carried out, as stated, through the. instrumentality of that company. But when the company’s note was paid, its bonds were neither returned, nor were they or the trust deed canceled. Instead, the bonds were retained by the bank as further security for notes held by it against the Memphis Company, and this was done with the sanction of B. B. Harvey. It is not claimed that the Reliance Company authorized this later use of the bonds, unless it did so through the execution of'its note before mentioned. We shall now consider the grounds upon which the bank seeks to justify its retention of the bonds; and it is to be borne in mind throughout that the bank’s rights are to be determined with reference to those of the bankrupt’s creditors.
1. The form of the $10,000 note. The note of the Reliance Company provided that “upon the discharge of this obligation” the bank might deliver the instrument (including, of course, the collaterals) to the maker, but that the bank should “have the right to retain the same to answer any other obligation, note, etc., * * * just as if specially pledged under an agreement in the exact terms of this.” The right thus reserved plainly had reference to some instrument which the Reliance Company was obligated to pay; but, apart from the bonds themselves, when the note was paid the bank held no obligation, certainly no express obligation, of the Reliance Company, and it has not held any since. It is insisted, however, for reasons presently to be stated, that the foregoing provision of the Reliance Company’s note empowered the bank to retain the bonds to secure notes executed and delivered to it by the Memphis Company as maker. It may be well to notice here what notes of the Memphis Company were held by the bank at the time the Reliance Company’s bonds were applied in pledge
“Buying, ginning, manufacturing, selling and merchandising baled cotton, seed cotton, cotton seed, cotton seed products, feed, and fertilizers produced from same and other substances, and other articles of commerce of general manufacture which come within the line of said business.”
The company was empowered “to borrow money and issue notes or bonds upon the faith of the corporate property”; but all the powers of the company were limited as follows:
“By no implication or construction shall the corporation be deemed to possess any powers except those hereby expressly given or necessarily implied from the nature of the business for which the charter is granted.”
Thus the Reliance Company acquired no express power under its charter to lend its credit to another corporation; and, as was said in Ward v. Joslin, 186 U. S. 142, 149, 22 Sup. Ct. 807, 809 (46 L. Ed. 1093):
“It must be assumed that the general rule is applicable that such companies have no implied power to lend their credit.”2
It is not pretended, much less shown, that any of the money represented by the notes of the Memphis Company was loaned by the bank upon any promise or request of the Reliance Company, or upon any understanding between the bank and either of the companies, or even with knowledge on the part of the bank, that the money was to be used for the benefit of the Reliance Company. The bank, therefore, must avoid the general rule that one person cannot make another his debtor without that other’s consent. The law, it is true, will in certain cases imply the existence of a contract where the facts do not, and upon the principle that one may not enrich himself unjustly at another’s expense; but this principle can afford the bank no claim against the Reliance Company. All the money obtained upon the notes of the Memphis Company was parted with by the bank upon the faith of that company’s promise and the pledge of its own bonds, and thus, since no fraud is either alleged or proved, the Memphis Company’s title to the money became absolute; whatever portion of this money, and the amount is not shown, Harvey may have used for the benefit of the Reliance Company, was therefore money of the Memphis Company and not of the bank; accordingly the bank cannot invoke the rule that allows money to be followed in equity, for that rule is confined to cases in which the money has the character of a trust fund. Peters
It results from all the foregoing considerations that the above-quoted provision of the Reliance Company’s note, however broadly interpreted, furnishes no justification for the retention of the bonds.
2. Harvey’s stock ownership in the Reliance Company gave him no title to the bonds. It is claimed that B. B. Harvey repeatedly stated to' the bank and the bank believed that he owned these bonds; it is not shown, nor is it very impqrtant, just when these statements were made, though it appears that they were in fact made. The only basis for this assertion of Harvey or for the belief of the bank, as the president of the bank evidently knew, was Harvey’s stock ownership in the Reliance Company. In the course of his direct testimony Harvey said in respect of the two corporations in question:
“I figured one was in the riglit-liand pocket and the other in the left.”
Again:
“Q. You heard Mr. Omberg [president of the bank] state you were the owner of the bonds ? A. That was true; I owned the corporations and owned the bonds: Q. You made the statement you owned the bonds? A. Yes, sir; I didn’t hesitate, because I owned the corporations. Q. That was your idea of the whole thing? A. That was my idea; it was my property.”
Moreover, the president of the bank testified in his cross-examination:
“Q. Now, at the time you got them, you knew they were the Reliance Cotton Company bonds? A. We also thought we knew they belonged to Mr. Harvey, individually. Q. Mr. Omberg, didn’t you understand that, or didn’t you suppose that, from the fact that Mr. Harvey was the owner or the principal stockholder in the Reliance Cotton Company — in fact, owned practically all of it? A. Yes; Mr. Harvey himself told us he was practically the sole owner Q. And he assumed, and you assumed, that made him the owner of the bonds of the corporation? A. He had possession of the bonds, negotiable bonds, and he put them up. I don’t know that we questioned the title to them. They were negotiable, in his hands, and payable to bearer. Q. You knew how they were issued, and the purpose for which they were issued, when they were issued? A. Yes; the whole thing was done with our knowledge.”
It is not clear whether the learned counsel for the bank claim that Harvey’s ownership of stock in the Reliance Company operated to invest him also with the ownership of the bonds; it is to be inferred from the record that counsel disavowed this theory in the court be
It is settled that a corporation, the artificial being, not the stock-holding body, owns the property; that the corporation alone can transfer the property, or charge it with liens, or the like; and that the corporation can act only through prescribed agencies, and subject to the limitations imposed by law. Humphreys v. McKissock, 140 U. S. 304, 312, 11 Sup. Ct. 779, 35 L. Ed. 473; Gottfried v. Miller, 104 U. S. 521, 528, 26 L. Ed. 851; Porter v. Pittsburg Bessemer Steel Co., 120 U. S. 649, at 670, 7 Sup. Ct. 741, 30 L. Ed. 830; Woodruff v. Shimer, 174 Fed. 584, 586, 98 C. C. A. 430 (C. C. A. 3); American Preservers’ Co. v. Norris, 43 Fed. 711, 714, and citations (C. C., per Thayer, J.); Fitzgerald v. Missouri Pac. Ry. Co., 45 Fed. 812, 818 (C. C., per Caldwell, J.); Electric Ry. Co. v. Jamaica & B. R. Co., 61 Fed. 655, 678, 679 (C. C., per Townsend, J.); In re Roanoke Furnace Co., 166 Fed. 944, 952 (D. C., by present Circuit Judge McPherson); Rough v. Breitung, 117 Mich. 48, 54, 75 N. W. 147; England v. Dearborn, 141 Mass. 590, 591, 6 N. E. 837. This doctrine prevails where even the entire capital stock is owned by a single person, and this, too, in Tennessee, where the present corporation was created. Parker v. Bethel Hotel Co., 96 Tenn. 252, 275, 277, 34 S. W. 209, 31 L. R. A. 706; and see Porter v. Pitts
“Q. You knew how they were issued, and the purposes for which they were issued, when they were issued? A. Yes; the whole thing was done with our knowledge.”
It was found by Judge McCall that, as respects the use of these bonds to secure debts of the Memphis Company, the bank did not obtain them in due course; and we think this conclusion is sustained by the record. The bank knew that the Reliance Company had issued the bonds to secure its own note, and the bank dealt with the company as the owner of the bonds; this was inconsistent with any idea that the bonds were owned by Harvey. The real basis for Harvey’s assertion and the bank’s assumption'(or belief, if it may be so called) that he was the owner of the bonds was the supposition of each that he owned the corporation. No other conclusion is reconcilable with the admissions of Harvey and the evident knowledge of the bank’s president; but it scarcely is necessary to say that the bank cannot take advantage of this clear mistake of law.
“Its [the company’s] obligations entered into for that purpose would be void in the hands of one who took them with notice.”
See, also, Hatch v. Johnson Loan & Trust Co., 79 Fed. 828, 836 (C. C.); Wheeler v. Home Savings Bank, 188 Ill. 34, 38, 58 N. E. 598, 80 Am. St. Rep. 161.
The decisions themselves upon which counsel rely in support of their claim that the negotiable character of the bonds warrants the retention in issue here, as, for example, Murray v. Lardner, 69 U. S. (2 Wall.) 110, 121, 17 L. Ed. 857, recognize the rule that no protection is furnished to persons dealing in negotiable instruments with notice of facts affecting the validity of the transactions. And see King v. Doane, 139 U. S. 166, 173, 11 Sup. Ct. 465, 35 L. Ed. 84.
The decree will be affirmed, with costs.
The decisions so cited are Bank v. Lumber Co. (1898) 100 Tenn. 479, 47 S. W. 85; Morrison Lumber Co. v. Lookout Mountain Hotel Co. (1893) 92 Tenn. 6, 20 S. W. 292; Providence Assurance Society v. Edmonds (1895) 95 Tenn. 53, 31 S. W. 168; Logan v. Ogden (1898) 101 Tenn. 392, 47 S. W. 489.
The familiar rule that one corporation is impliedly prohibited from guaranteeing or otherwise agreeing to pay the debts of another has prevailed so generally as fairly to warrant omission of citations in its support, though it may be well here to call attention to the following: Humboldt Min. Co. v. American Manuf’g, Mining & Milling Co., 62 Fed. 356, 361, 362, 10 C. C. A. 415, and citations (C. C. A. 6), in which Judge Taft distinguished Marbury v. Land Co., 62 Fed. 335, 10 C. C. A. 393, decided at the same session; In re Liquor Dealers’ Supply Co., 177 Fed. 197, 199, 200, 101 C. C. A. 367 (C. C. A. 7), where the fact that the corporate officer specially empowered to conduct the transaction owned most of the stock in the two corporations concerned was held not to invest the guaranteeing corporation with “authority to exceed its powers wherein the interests of creditors and the public are involved”;
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